It is as challenging as ever to manage apartment on behalf of third parties. Keat Foong, executive editor, MHN, interviews leading fee management companies regarding the state of the industry, the ways in which fee managers serve property owners, and lessons in exceeding client expectations. Participating in the Q&A are Terry Danner, executive director of Greystar; Lee Felgar, president of Pennrose Management Co.; and Kelly Scott, vice president of third party operations at Gables Residential.

What is driving the third-party management business today?

Terry Danner: The third-party apartment property management business is being driven by a number of factors. The increased ownership by institutions has created a need for third-party management, as banks and other financial institutions are often prohibited from managing their own assets due to government regulations. The expectations of institutional owners are also driving a greater level of sophistication among third-party managers in operations and financial reporting.

Private owners are increasingly looking for the expertise offered by third-party managers as our industry is much more technology driven. The level of sophistication required to manage multifamily projects, including the risks, the people, and the dynamic environments that exist today is much greater than it was even a decade ago.

For the industry as a whole, growth is coming from the development of new product, improving employment, and a continued lower rate of home ownership. And the growth is not just in the United States, there is a growing need for multifamily product and professional management internationally as well.

Kelly Scott: The business has become very competitive. Because of the large sizes of companies, and the need for economies of scale, third-party apartment property management companies are having to remain in a constant state of growth. Consequently, they’re always looking to acquire new clients and new assets. The way to attract new business is by being better than the competition; so every day we’re thinking of ways to raise the bar so that we can be more competitive.

You also have to keep your eyes on the horizon and be prepared for property disposition, which is a part of the game. If there is a new buyer looking to purchase your client’s asset, and they happen to have their own in-house management company or perhaps a preferred management company that they have a relationship with, there is the potential for them to review your entire portfolio with just a 30-day’s notice. That has a significant impact on your business.

Lee Felgar: I believe owners are looking for third-party or fee managers who can bring a collection of services to property management engagements. These services extend beyond the leasing of units, and include social media, enhanced website development, use of technology to improve operations, and an understanding of costs and trends. Owners want and expect to hear our perspective on underwriting, rents, design, decoration, variations on staffing models, and more. They expect us to bring our network of resources both within our company and outside of our company to their development, which is appealing to us.

Has the third-party apartment property management business become more competitive, less competitive or remained stable in terms of competitiveness?

Felgar: It has become more competitive from my viewpoint, especially as the consolidation within the industry has produced some larger, powerhouse firms. Still, I think there is a need for “boutique-type” fee managers, like us who have high-caliber staff members that don’t have seven different clients at one time. This supports our clients getting the focus and resources they need for their developments to be successful. Our customer count is lower, by our choice, and our clients prefer it that way.

Danner: I can’t recall a time since I first got into third-party management back in the late-’80s when it has not been highly competitive, so I would not say that it is become any less competitive. The names of the players may have changed over the years due to mergers, acquisitions, and groups going public or changing corporate strategy, but those groups that have remained committed to the business have made it very competitive for all industry participants. This trend should continue as new development and transaction volume increases, and more properties are in play. New regional players are born every day as the market has sustained growth, giving them enough critical mass to justify operating a management company.

Institutional owners and private owners alike often go through a competitive bidding process in selecting a third-party manager. And with most third-party property management contracts being cancellable in 30 days, property performance is paramount. Property owners are under constant pressure by partners and investors to insure their assets perform. They will not hesitate to make a change if they feel their property or portfolio is underperforming.

What benefits and challenges are faced by the fee management business?

Scott: Let’s start with the benefits. The reason to hire a third-party property management company is that we are, in a nutshell, better trained. We are better prepared to handle the enormous details that are involved in the day-to-day business. One of the most critical reasons that a client would hire us, rather than try to do it themselves, is that we are better equipped to hire, train and retain high-level employees. We are also capable of providing better compensation programs. Hiring the right people in place is significant-—it is really what separates us from the rest.

And because we are larger than most in-house shops, we are better able to capitalize on the economies of scale. An example of that would be the discounts we receive on bulk purchasing. And we have marketing, training and development departments. For example, we have complete marketing programs in place. Most in-house shops do not have these types of benefits. Another benefit would be that we are trained to understand and comply with the local, state, federal laws and regulations, for example, of Fair Housing laws. It comes down to our ability to handle the headaches and enormous details, so that the client can focus on what is most important for them.

The challenges? The third-party profit margins are lower than in the past. We don’t receive the same fees that we did before. We have to be more creative, to work harder. Part of the reason is that clients are more demanding. They really expect higher returns on their investments, and higher quality services. As a result, you have to increase rents aggressively, which we have, and continue to do. But residents demand superior customer service in return, as well as additional services and amenities.

We have to continue to work to save money in creative new ways, to work to improve productivity through, for example utilizing new technology. We always have to be on the lookout for better ways to “get it done.”

Danner: One of the benefits is the strong relationships we’ve formed over time with property owners. Good performance and service builds trust. That trust leads to new opportunities in all three lines of our business, including property management, investment management and development. These relationships often lead to mutually beneficial opportunities for our clients to work together.

The other benefits are greater stability and increased organizational knowledge and experience. Owner operators don’t gain as much organizational knowledge and experience as third-party managers who are often working with multiple property types, asset classes, and in more markets.

Owner operators are often subject to much greater volatility when market conditions change and find it more challenging to keep their top talent over time. Top talent wants both stability and opportunity. Having a greater presence in a market provides corporate and on-site team members with more stability and opportunities for advancement. In the case of a company the size of Greystar, advancement opportunities can be local, but they may also be elsewhere in the country if someone wants to experience new areas or chooses to move due to family circumstances.

One of the challenges of third-party management is working with multiple property owners with different investment goals and philosophies. The flip side to this is that it’s also a great learning experience for our team members. As a third-party manager you have to be very attentive to the goals and needs of your clients and be flexible in your thinking. The other ever-present challenge is performance. Third-party management contracts are typically 30-day cancellable. So, meeting and exceeding client expectations for property performance is continually our focus.

Felgar: We are not a fee-driven company. We engage in fee management to help similar companies and partners be successful. We want to build relationships with our clients to do more than fee management. We like to partner, joint-venture and, frankly, learn from our clients, as well as give them information and services. We openly share best practices with our clients and are re-energized with each new opportunity.

What is your company’s strategy as far as competing for new third-party business?

Scott: I’ve been in the industry a number of years, and the strategy of Gables is unique to the industry. We are not overly aggressive in acquiring new business, nor do we cast a wide net, as many competitors do. What we primarily focus on is the business at hand: We partner closely with our existing clients to invest a lot of time and energy on their assets. There is no cookie cutter approach. We really sit down and listen to what our clients want, and we evaluate their needs constantly. We spend a lot of time surveying them, and we respond accordingly to that feedback.

The result is that a large amount of our new business comes from existing clients and referrals. As you know, word of mouth is a very powerful form of advertising and a great form of new business development. There is a lot of pressure in keeping the bar high, because we have a great reputation with our existing clients. We have to keep that bar high, and we do so by keeping the main focus on day-to-day operations.

Felgar: We do not compete in the traditional sense of the fee management business. Typically, we learn of opportunities through our staff members’ industry affiliations, and we are constantly being introduced to clients through our general contractors, architects and attorneys. We like it this way, and I think our clients like it this way as well. We’ll leave the “cold-calling” to others. We think this business is about reputation and trust.

Danner: Our strategy is to have the best local teams of real estate operators in each of the markets we serve. Multifamily management will always be locally focused because ever-changing dynamics require rapid response times by those best suited to develop appropriate and prompt responses to situations. By fielding the best local teams and equipping them to be successful, we feel we can compete with any company in the industry.

We equip our local teams with a combination of national and regional industry-leading support in human resources, technology, marketing, accounting, property and resident services so that they can remain focused on real estate operations and property performance. Our national presence also allows us to share developing trends and practices across the country, and to benchmark our performance over a broader base of assets.

Q: How are you seeking to distinguish yourself from your competitors?

Danner: We believe real estate is ultimately a very local business. Our constant focus is to retain and attract the best local talent in each of the markets we serve. Our scale allows us to offer greater support and opportunity than our competitors can provide. We have a greater level of organizational knowledge and experience and much more specialized support, which allow our on-site teams to be more successful and focus on serving our residents and clients. Having a greater presence locally, nationally and internationally, creates more opportunities for our team members.

We also capitalize on our size by negotiating the best product and service prices for our clients and then we monitor properties to ensure they’re taking advantage of those pricing advantages. Purchasing is just one element of our Advantage Services group, which also works to provide our clients with the best possible pricing and service in utility billing, collections, prospect screening, renters insurance, resident services, telecom consulting, and client property insurance. These are just a few of the ways that we’ve begun to create some blue sky between us and our competitors. Greystar’s acquisition of Riverstone is just one more step in expanding our local presence and implementing and advancing leading edge systems to the benefit of our clients and residents.

Felgar: Simply stated, we work very hard and effectively at making every one of our apartment communities successful on a number of different levels—for the client, for the residents, the communities, and for community leaders. In doing so, word gets around that Penn-rose really can bring it all together to achieve great outcomes.

Scott: I can tell you that our people stand apart. We hire people, train them incredibly well, support them, and treat them with integrity and respect—the very foundation of the company. Where the results really show lies in the awards we receive. We have received award after award for our development, management and operations. I am just amazed at the number of awards that continue to come in. I think these awards are really the result of our raising the bar everyday. [Gables was the recipient of MHN’s 2014 Excellence Awards for Property Management Company of the Year, Best Property Manager, Best Leasing Agent, Best Marketing Program and Development Company of the Year. Among other awards the company received this year was another Property Management Company of the Year award, from the National Association of Home Builders.]